Business Plan KNEC Notes

Chapter 1: Introduction to Business Planning

1.1. Meaning of a Business Plan

A business refers to a document that is used by entrepreneurs or business leaders to show the feasibility or potential of their new businesses, and provides a roadmap for the business in its first few years. Business owners use a business plan as an essential tool to create a new business as a start-up or an offshoot of an existing business.

1.2. Purpose of a Business Plan

The primary purpose of a business plan is to identify, describe and analyze a business opportunity. Business owners use a business plan for various reasons:

  • To determine the feasibility of their business
  • To establish constraints that may affect the business
  • To determine opportunities available for the new business
  • To demonstrate viability of their business in order to secure funding.
  • To create an effective strategy for business growth
  • To establish future financial needs of the business
  • To attract investors and lenders to fund the business.

1.3. Features of a Business Plan

A business plan is composed of several sections:

  • An executive summary that summarizes all the components of the business plan. It describes the problem that the business aims to solve, or a need that will be met. This is following by brief summary of all sections of the business plan.
  • Business description section describes the nature of the business, its purpose, and the target market
  • Marketing plan follows, with a comprehensive analysis of all the marketing strategies and tactics that the business will use to attract customers. This includes details of competitors and how the business will deal with them.
  • Organization and Management section describes the organizational structure, as well as roles and responsibilities of different positions and departments.
  • The Products section describes the product on offer comprehensively. This includes an examination of the products to be sold, and how such products will be managed to achieve high quality.
  • The Financial Plan section highlights the projected cash flows, income statements, and balance sheet of the company. This shows how funds are utilized to generate profits.

Chapter 2: Business Description

2.1. Business Name

  • Give the name of the business
  • Describe how the name of the business was selected
  • Come up with the logo of the business: The logo identifies the business
  • Elaborate more on the slogan/motto

2.2. Business Location

Include the following details in this section:

  • Location of business, place and site.
  • The site should be specific
  • Map of location
  • Physical address including postal address and email address
  • Website

2.3. Form of ownership

  • The form of business may include:
  • Sole proprietorship.
  • Partnership
  • Company-private or public.
  • Cooperative
  • Give reasons for choosing that kind of ownership
  • Give advantages and disadvantages to show that you understand the form of organization that one want to embark on.
  • Type of business: Is the business start-up or ongoing?
  • Give activities of the business (wholesaling, retailing, manufacturing, logistics)

2.4 Products and services

  • Which products or services are you going to offer?
  • Describe clearly the features of the above stated elements and indicate the size, colour, shape, materials, quality and packaging of the products.
  • Capture the benefits that customers will obtain from using your products/services.
  • Consider the following,
    • Performance
    • Convenience
    • Economy
    • Comfort
    • Durability
    • Usage
    • Flexibility
    • Servicing

2.5 Justification of the opportunity

  • Give the reasons for choosing the kind of the business e.g.
  • Exploit the available resources
  • Nutritional value of opportunity
  • Niche market
  • Technological advancement
  • Professional qualifications
  • Unmet demand
  • Favorable climate
  • Infrastructural advancement
  • Good security

2.6 Industry

  • Which industry does your proposed business belong to? E.g. Matatu, logistics/transport industry
  • Consider the total number of firms in that industry or competitors
  • Evaluate the industry trend i.e. growing, stable or declining emanating from dynamics
  • Explain what is happening in that industry…scan the trade cycle
  • Evaluate the industry characteristics in terms of;
  • Capital requirement.
  • Kind of technology.
  • Labour requirement.
  • The main industries are: Agriculture, manufacturing and allied, transport, education, health, banking, insurance, automobiles and accessories, commercial and services, construction and allied, energy and petroleum, investment, telecommunication and technology

2.7 Business goals and objectives

Short term goals

Critically examine what the business want to achieve in short term e.g.

  • Become the quality leader
  • Market leader
  • Penetrate in other markets
  • Maximize profits
  • Increase sales turnover
  • Minimize costs
  • Optimal use of available resources
  • Satisfy customer needs and wants (niche marketer) e.g. equity bank – Addressing grievances of low income earners.

Long term goals

Entails what the business would like to achieve in long run. You just need to extend the above short term goals to focus on a longer period of time, e.g. maximizing profits in the next 5-10 years.

2.8 Entry and growth strategy

Entry strategy/plan

  • How will you penetrate and gain acceptance in the market?
  • Consider the competitive advantages among the competitors, pricing and advertisement/promotional methods.
  • Examine weaknesses of the competitors’ e.g. poor leadership, unskilled workforce, insufficient resources, poor product quality, slow distribution and delivery channels, outdated technologies and poor of planning etc.
  • Craft the best pricing plan
  • Craft the best methods to attract customers.
  • Growth strategy/plan
  • Evaluate trends that signal business growth.
  • Evaluate opportunities emanating from the trends/prevailing opportunities.
  • Craft plans to take advantage of opportunities.

2.9 SWOT Analysis

Carry out SWOT analysis or use the Marketing mix elements (8 ps) when crafting entry and growth plans. The SWOT analysis is one of the very useful tool for understanding and decision-making for all sorts of situations in business and organizations. SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats. A scan of the internal and external environment is a crucial part of the strategic planning process, which is being covered by SWOT analysis. It is used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. Strengths, Weaknesses are considered to be internal to the corporation or organization whereas Opportunities, and Threats are part of the external environment. The analysis involves identifying the purpose of the business venture or project and recognizing the internal and external factors that are favorable and unfavorable to achieve that goal.

Strengths

These are those things you do well, the high value or performance points. Strengths can be tangible e.g. loyal customers, efficient distribution channels, very high quality products, excellent financial condition. Strengths can also be intangible e.g. Good leadership, strategic insights, customer intelligence, solid reputation, and high skilled workforce often considered ‘core competencies’.

Weaknesses

Refers to those things that prevent you from doing what you really need to do. Since weaknesses are internal, they are within your control. Weaknesses include; bad leadership, unskilled workforce, insufficient resources, poor product quality, slow distribution and delivery channels, outdated technologies, lack of planning etc.

Opportunities

Refers to a chance for a firm to grow or progress due to a favorable juncture of circumstances in the business environment. Opportunities can be a potential areas for growth and higher performance. The possible opportunities include; Emerging customer needs, Quality improvements, Expanding global markets, Vertical integration etc.

Threats

A threat is a factor in your company’s external environment that poses a danger to its wellbeing. It considered to be challenges confronting the organization, external in nature. The possible threats include; New entry by competitors, changing demographics or shifting demand, emergence of cheaper technologies, regulatory requirements etc. Threats can also take a wide range of bad press coverage, shifts in consumer behavior, Substitute products, and new regulations.

Chapter 3: Marketing Plan

The marketing plan section of the business plan describes the user benefits, available products and services and the type of market that exists.one plans on how to market products/services and the main features are:

  • Describe your customers well ranging from institutions, hospitals, Churches, Individuals, Wholesalers, Retailers and Households.
  • Determine location of your customers in terms of their demographic characteristics
  • Consider customer characteristics and considerations on products i.e. price, quality, appearance, color, shape, material, size, weight, volume and efficiency.
  • Business considerations when targeting customers:
    • Advertisement and promotion
    • Variety of goods and services
    • Credit facilities
    • Capability of employees
    • Methods of selling.

3.2 Market Share/Size.

This is the amount of unit sales e.g. what is your estimated/expected total sales in units per month or even quarterly or yearly.in estimating the market size, one needs to list down the business selling similar products in market e.g. show using a pie chart, bar graph, line graph, give or frequency polygon.

Table 1: Hypothetical/model of a given market tabular explanation.

Before Penetration in the Market

A B C Total
Sales 20,000 40,000 40,000 100,000
Market Share 20% 40% 40% 100%

 

After Penetration

A B C D Total
Sales 20,000 40,000 40,000 20,000 120,000
Market Share 17% 33% 33% 17% 100%

3.3 Competition

  • Analyze key competitors in terms of strengths and weaknesses
  • Consider what the competitors are doing
  • Analyze the factors that may have contributed to success or failure of the competitors.
  • Determine if there are gaps to be filled.
  • Determine your potential competitors and their sizes in assets, sales volume and market share of major competitors.
  • Determine strengths and weaknesses of competitors.
  • Craft techniques and plans to capitalize on weaknesses of competitors

Assuming that we have 3 firms A, B and C,

Table 3- Hypothetical/model of a given market tabular explanation

3.4 Promotion strategy

  • This section describes entrepreneurial approach to creating awareness of products and services and motivating customers to buy.
  • Elements of advertising commonly used are: personal selling, sales promotion, publicity, public relations, sponsorship and customer relationship management.
  • Medium/media used should be well designed i.e. electronic or print media.
  • How will you portray your products?
  • What image do you project in mind of consumers?
  • How often will you advertise your products or services
  • How much will each advertisement cost?
  • How will you measure the effectiveness of your advertisement?
  • Which promotion campaign will you undertake when introducing the product or service e.g. free samples or free introductory services
  • Which promotional methods will you employ on regular basis e.g. trade shows, sponsorships and cost of promotion per event
  • How will you measure the effectiveness of your promotional campaign?

3.5 Pricing Strategy

  • Include methods of calculating selling price for your products and services.
  • Factors likely to influence price setting include;
  • Income of clients targeted
  • Prevailing market prices
  • Cost of raw materials
  • Nature of competition.
  • Incorporate actual selling prices of products and services.
  • Arrive at credit terms to be offered.
  • What kind of credit?
  • When are you going to offer credit e.g. end month
  • When will customers payback.
  • Enlighten the customers on the types of discounts offered e.g. cash, trade (quantity)
  • Enlighten members on the available after sales services available.

3.6 Sales Tactics

  • Refers to the methods of selling either directly or indirectly (use of agents)
  • If you intend to sell through distributors/agents, how will you select and motivate them? For middlemen, you can use already used by many competitors and select the ones with high reputation. One can motivate middlemen by giving them high profit margins.
  • Establish the geographical areas that your agents will cover.

3.7 Distribution Strategy.

  • This section covers the physical movements of products and may incorporate establishment of middlemen/intermediaries to achieve or support movements
  • Channel is either direct or indirect.
  • Means of transport used is either road, rail, water or air.
  • Analyze the specific distribution problems likely to be experienced.
  • Craft ways of curbing the problems anticipated.

Chapter 4: The Organizational Plan

4.1 Organizational Structure

Have a chart to represent the following organization structures:

  • Line structure
  • Functional structure
  • Divisional structure
  • Matrix structure
  • Project structure
  • Committee structure

4.2 Management Team/Key Personnel

  • Include all members of management team for your enterprise e.g. procurement manager, human resource manager, managing director, production manager, marketing manager, finance manager etc.

4.2.1 Duties and Responsibilities

  • Describe each of the managers stated above
  • Give the qualifications e.g. managing director one must have a master’s degree and CPAK depending on the nature of the business
  • Give the experience needed e.g. 15 years’ work experience at a managerial position.

4.2.2 Purchasing Manager

  • Give duties and responsibilities
  • Qualifications
  • Experience

4.3 Other Personnel

Includes other employees who are not in the management team, e.g.

Title Number Qualifications Duties
Accountant 1 Bachelor of Commerce Budgeting, financial reports, payroll
Sales Representative 2 KCSE C, Diploma in sales and marketing Distributing products and sales promotion
Security Office 1 At least KCSE Certificate Providing security

 

4.4 Recruitment, Training and Promotion

4.4.1 Recruitment

  • Describe how managers and other personnel will be recruited
  • For management team, the following techniques may be used; poaching, advertisement, recruitment agencies.
  • For the other personnel, the following techniques may be used: poaching, recruitment agencies and word of mouth.

4.4.2 Training

  • Induction training will be given to newly employed staff and also for those who are promoted.
  • One may use on job training
  • Off job training including workshops and seminars for staff may be employed.
  • Explain the purpose of training.

4.4.3 Promotion.

  • Devise the criteria of promoting personnel e.g. promotion on basis of evaluation, training and attaining a given qualification and experience.

4.5 Remuneration and incentives.

4.5.1 Remuneration

  • Indicate firm policy on remuneration e.g. to offer attractive salaries to employees so as to motivate and retain them.
  • Devise excellent payment terms, monthly and yearly

4.5.2 Incentives

  • Includes bonuses, commission, lunch, tea, and overtime allowance.

4.6 Licenses, permits and by-laws

4.6.1 Licenses

  • Trading licenses are paid for in order to start trading
  • Establish where you are going to get the license and know the charges i.e. from national or county government
  • State the purpose of the trading license.

4.6.2 Permits

One should visit the relevant office for assistance e.g.

  • Milk business, one gets permit from Kenya dairy board
  • Beer-Kenya liquor licensing board
  • School-ministry of education/district education board.

4.6.3 By-laws

  • The business need to comply with the by-laws issued by authorities in place e.g. international, national or county governments.
  • Give reasons why your business needs to comply with the set guidelines.

4.7 Support services.

  • The business will require support services to enable it carry out its operations effectively e.

4.7.1 Banking Services

  • Choose the best bank and branch
  • Open the account that suits you
  • Give the purpose of the account

4.7.2 Insurance services

  • Settle with the best insurance company that will insure your firm
  • Indicate what you want to insure against
  • How much will the insurance package cost you?

4.7.3 Consulting services

  • Depending on the nature of the business, establish the best consultancy services providers e.g. for a school, one can get advice from teachers or lecturers.
  • Indicate your consultants and the kind of advice expected.

4.7.4 Legal services

  • The services will be needed when writing contracts, drafting legal letters, interpreting labor laws and employment related concerns and issues.
  • Indicate the legal firm and lawyers
  • Indicate the registered office

Chapter 5: Production and Operational Plan

This section offers information on how a product will be produced or how a service will be provided.

5.1 Production Facilities and Capacity

  • Give the types of facilities required.
  • List all the equipment, machineries and show the cost of each.
  • List any other facility required to set up the business and show the cost.
  • Elaborate more on plans for repairs and maintenance of machinery.
  • Come up with the factory/office layout.
  • Come up with the levels of production i.e. minimum and maximum.
  • Elaborate more on expansion and future plans of office or factory.
  • Firm Layout: Draw the firm layout.

5.2 Production Strategy

  • The means and methods used to produce the products are given.
  • Describe the production development from idea to saleable product/service.
  • Indicate the costs that you will incur when developing your new products
  • Highlight the methods to use e.g. JIT
  • Take into account the changes you anticipate in technology and how you will address them.
  • Are there any alternative sources available?
  • Describe the skills required for efficient production for direct and indirect workers
  • Describe the monthly production cost for products and services.
  • Compute the total production cost in a month
  • Elaborate more on purchasing and stock control methods to use e.g. EOQ, JIT

5.3 Production Process

  • Give the stages in producing products and offering services.
  • Give the production materials used in production process
  • Give the external factors that are likely to affect the production process.
  • How will you minimize the effects of external factors?
  • Indicate the factors that affect the production process.

5.4 Elements affecting production operations

  • Health regulations
  • Ensure that all public health guidelines are adhered to in handling all company’s products.
  • Regular advice sought from government departments.
  • Give the necessary measures that you would take or will be followed to guard against physical injuries of workers e.g. use of mask, boots, jackets and helmets

5.5 Environmental Regulations

  • Environmental concerns are one of the emerging issues in running of any business.
  • Adhere to the legislations set by the government.
  • Regular audits should be undertaken to check their availability and efficiency
  • Are there measures to conserve the environment? For instance, what environmental concerns will be undertaken e.g. planting trees?

Chapter 6: Financial Plan

The main reason for preparing a business plan is to receive funds. When preparing the plan, one analyzes the financial requirements of the business. The financial plan is an important part of the business plan because it is here that the profitability of the intended business is demonstrated to the entrepreneur and to the potential financiers. It provides a tool for monitoring the financial performance of the business. In this chapter of the business plan, an analysis of financial requirements of a business is presented. The financial plans development is also illustrated.

Objectives of the Financial Plan

  • Maintain a healthy liquidity position throughout the trading period.
  • Maintain return on owners’ equity (ROE) e.g. at 25%
  • Realize a steady growth on income throughout the period.
  • Maintain and control expenses.
  • Maintain an effective accounting sytem – quick books, sage, any accounting related software

Financial Assumptions

  • The expenses are expected to rise by 5% as business operations expand.
  • Creditors are to be increased by a certain percentage per year.
  • Debtors are to increase by a certain percentage per year
  • Net profit is expected to increase by a certain percentage per annum
  • Net profit realized would be ploughed back to the business so as to expand the business.

In the financial plan, you will deal with financial aspects of your proposed business. To gauge your future financial potential, you will prepare:

  • Proforma/projected balance sheets,
  • Proforma profit and loss accounts and
  • A projected cash flow statement.

You will also determine:

  • The break-even level of sales
  • Calculate the expected profitability ratios of your business
  • Financial requirement
  • Proposed capitalization.

Pre-operational costs

Entails costs incurred before the start of the business.

5.2 Proforma Balance Sheet

A balance sheet is a financial statement that shows the financial position of the business for a certain period of time (usually one year). This financial statement depicts the financial structure of a business at the end of an accounting period. It has three major components: assets, liabilities, and stockholders’ equity. They show what the business owns or controls, how much is owed to creditors, and the residue net worth of the enterprise after asset value has debt subtracted from it.

To prepare this document one should understand the concept of Basic Accounting Equation that appears like this. A = C + L; where A = total Assets; C = Equity; L = Liabilities.

Accounting is considered the language of business

Analysis of the Basic Accounting Equation

  • Assets

Some assets are tangible like cash while others are theoretical or intangible like goodwill or copyrights. Another common asset is a receivable. This is a promise to be paid from another party. Receivables arise when a company provides a service or sells a product to someone on credit. All of these assets are resources that a company can use for future benefits.

Assets are classified in two main types:

  • Fixed/Non-current assets: Required by the business to assist in earning revenues and not for sale. They are normally expected to be in business for more than one year.
  • Current assets: They are not expected to last for more than one year. They are mostly directly related to trading activities of the firm.

Here are some common examples of assets:

  • Cash at bank
  • Accounts Receivable/debtors
  • Prepaid Expenses
  • Vehicles
  • Buildings
  • Goodwill
  • Copyrights
  • Patents
  • Land
  • Fixtures
  • Furniture
  • Plant and machinery
  • Stock
  • Cash in hand
  • Prepayments
  • Liabilities

A liability, in its simplest terms, is an amount of money owed to another person or organization. Said a different way, liabilities are creditors’ claims on company assets because this is the amount of assets creditors would own if the company liquidated. A common form of liability is a payable. Payables are the opposite of receivables. When a company purchases goods or services from other companies on credit, a payable is recorded to show that the company promises to pay the other companies for their assets.

Here are some examples of some of the most common liabilities:

  • Accounts payable /creditors
  • Bank loans
  • Lines of Credit
  • Personal Loans
  • Officer Loans
  • Unearned income
  • Bank overdraft
  • Accruals

Liabilities are classified in two main types

  • Long term liabilities: They are expected to last or to be paid after one year e.g. 5 years loans from a bank.
  • Current liabilities: These are liabilities that last for a period of less than one year and therefore would be paid within one year.
  • Equity (Capital)

Equity represents the portion of company/business assets that shareholders or partners own. In other words, the shareholders or partners own the remainder of assets once all of the liabilities are paid off.

  • Equity = Assets – Liabilities.
  • C = A-L

Variables Affecting Capital

  • Additional investments
  • Net profit
  • Drawings

One can prepare a vertical or horizontal/T balance sheet.

  • Horizontal /T format

  • Vertical Format

Non-current assets are listed in order of performance as shown i.e. from land and buildings to motor vehicles. The current assets are listed in order of liquidity i.e. which assets is far from being converted into cash. Example, stock is not yet sold, (i.e. not yet realized yet) then when it is sold we either get cash or a debtor (if sold on credit). When the debtor pays then the debtor may pay by cheque (cash has to be banked) or cash.

The current liabilities are listed in order of payment i.e. which is due for payment first. Bank overdraft is payable on demand by the bank, then by creditors.

5.3 Working Capital

Working capital = Current assets – current liabilities.

Cash flow projection

This is a financial statement that shows cash in and out of the business.

  • Transactions that generate cash in a business include: sales, payments from debtors, discount received, rent received, loan received and many more.
  • Transactions that may reduce cash in a business include: purchases, salaries/wages, rent payments, payment to creditors, standing orders, discount allowed and many more.

NB It’s always good to prepare cash flow projection for three years.

A business enterprise normally prepares the following two financial statements

  • Profit or loss or income statement which helps to find out the profit or loss made as result of operations of the company over a specified period.
  • Balance sheet or financial position statement which reflects the state of asset and liabilities of company on a particular period.

Another required financial statement is cash flow statement. This is requirement of International Accounting 7 (IAS 7)

Need for Cash Flow Statement

Users of financial statements, require understanding how the business generated cash and how the cash was used. Unlike the income statement where profit reported is influenced by accounting policies and estimates, cash flow indicate the performance of the business enterprise without such influences, therefore provide a better perspective to evaluating the performance. Remember that a business enterprise can be making profits, while at the same time suffering from cash crisis. This can lead to business enterprise wind up.

Components of a Cash Flow Statement

Cash flow statement summaries the cashbook, by reconciling the opening and closing balance of the cash and cash equivalents.

  • Cash
  • Demanded deposits in banks
  • Short term investments
  • Bank overdraft

The cash movement activities are classified into 3 categories:

  • Operating cash movement/ activities
  • Investing cash movement/ activities
  • Financial cash movement/ activities

Uses of Cash Flow Statements

Cash flow statements have many uses other than the legal need for some companies to prepare them. A few cases where a business might find them useful is answering such questions as below

Small businessman may want to know why he now has an overdraft. He started off the year with money in the bank, he has made profit and yet he now has a bank overdraft. Another businessman may want to know why the bank balance has risen even though the business is losing money. The partners in a business have put in additional capital during the year. Even so, the bank balance has fallen dramatically. They may want explanation as to how this has happened. A study of the final accounts themselves would not give them the information that they may needed. However, a study of the cash flow statement in each case will reveal the answer to their questions. Besides the answers to such specific queries, cash flow statement should also help businesses to assess the following:

  • The cash flows which the business may be able to generate in the future;
  • How far the business will be able to meet future commitment, e.g. tax due, loan repayments, interest payments, contracts that could possible lose quite a lot of money;
  • How far future share issues may be needed or additional capital in the case of sole trader or partnership;
  • A valuation of the business

Projected Cash Flow Format

  • Projected cash flow for the year 20xx
  • Projected cash flow for the year 20xx
  • Proforma income statement (Trading, Profit and Loss account)

This is one of the final account and has two sections

Trading account

Summarizes trading activities i.e. sales and purchases of goods of a business and tries to determine the gross profit for the relevant financial period.

The gross profit is then taken up in profit and loss account as part of the income

Profit and loss account.

It shows the net profit/net loss of the business as made from all the activities during a financial period. The net profit/loss is determined by deducting expenses from all incomes of the same financial period.

5.5 Proforma income statement for the year 20xx